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What does the US debt limit mean to investors?


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RV, Brookings is one of the others that I considered posting. Thanks! Here is more food for thought.

What Is the Debt Limit and What Happens If the US Defaults?

 

When Congress passes a spending bill, they decide what the government will spend its revenue on. That revenue comes mostly from taxes, but also from things like customs duties at the border and the sale of natural resources, according to the U.S. Treasury's Fiscal Data website.

Most of the time, the government doesn't have enough revenue on hand to pay for everything in those spending bills — such as infrastructure, social security, Medicare and defense. That's been the case since at least 2001, which was the last time the Treasury says more money was brought in than spent in a single year.

And another to consider?

Debt ceiling: 5 devastating consequences if Congress doesn’t raise or suspend the limit?

1. Government obligations such as Social Security or Medicare disbursements could be at risk

2. Buying a home, car or credit card borrowing could get more expensive.

3. Stock prices could sink, threatening companies’ bottom lines.

4. The government could default on its debt, triggering a recession, job losses and income disruptions for millions.

5. Even if the debt ceiling is raised in time, Americans could feel financial pain.

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25 minutes ago, Ray,IN said:

However nowhere does it explain what happens when some or all the national debt is called by the lenders.

How would that ever happen? A major share of it is in bonds and treasury bills. 

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After reading all the linked articles and many I've found using a search engine, the U.S.A. debt is a house of cards. The Federal Reserve owns 78% of the national debt, and stays afloat by printing money out of thin air. This of course is completely legal since U.S.A. currency is no longer based on gold or silver.

I suppose we could run a family like this, borrow from your wife and each child to spend more money than we have, with the expectation of never repaying anyone; but in the beginning we gave them the money, so we'd have to print more money to be able to borrow from them, however that is illegal for all except the federal government.

I find this very interesting: "Intragovernmental Debt

The Treasury owes this part of the debt to other federal agencies. Intragovernmental holdings totaled more than $6.89 trillion in January 2023.1 Why would the government owe money to itself? Because some agencies, like the Social Security Trust Fund, take in more revenue from taxes than they need. These agencies then invest in U.S. Treasurys rather than stick this cash under a giant mattress,

source: https://www.thebalancemoney.com/who-owns-the-u-s-national-debt-3306124

 

This transfers the agencies' excess revenue to the general fund, where it's spent. They redeem their Treasury notes for funds as needed. The federal government then either raises taxes or issues more debt to raise the required cash. 

 

 Japan holds $1.3 trillion in  U.S.A. debt; China holds $1.1 trillion. Sure that is a small fraction of $31 trillion, but what happens if they call that debt?https://finmasters.com/who-owns-the-us-national-debt/

 

This entire thread is quite useless, as nothing we can do will  make a difference. It is all ran by what some refer to as the shadow government.

An interesting fact I came across during searches is this:

Which President is responsible for the highest percentage increase in national debt? https://www.self.inc/info/us-debt-by-president/

Edited by Ray,IN
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8 hours ago, Ray,IN said:

After reading all the linked articles and many I've found using a search engine, the U.S.A. debt is a house of cards. The Federal Reserve owns 78% of the national debt, and stays afloat by printing money out of thin air. This of course is completely legal since U.S.A. currency is no longer based on gold or silver.

I suppose we could run a family like this, borrow from your wife and each child to spend more money than we have, with the expectation of never repaying anyone; but in the beginning we gave them the money, so we'd have to print more money to be able to borrow from them, however that is illegal for all except the federal government.

I find this very interesting: "Intragovernmental Debt

The Treasury owes this part of the debt to other federal agencies. Intragovernmental holdings totaled more than $6.89 trillion in January 2023.1 Why would the government owe money to itself? Because some agencies, like the Social Security Trust Fund, take in more revenue from taxes than they need. These agencies then invest in U.S. Treasurys rather than stick this cash under a giant mattress,

source: https://www.thebalancemoney.com/who-owns-the-u-s-national-debt-3306124

 

This transfers the agencies' excess revenue to the general fund, where it's spent. They redeem their Treasury notes for funds as needed. The federal government then either raises taxes or issues more debt to raise the required cash. 

 

 Japan holds $1.3 trillion in  U.S.A. debt; China holds $1.1 trillion. Sure that is a small fraction of $31 trillion, but what happens if they call that debt?https://finmasters.com/who-owns-the-us-national-debt/

 

This entire thread is quite useless, as nothing we can do will  make a difference. It is all ran by what some refer to as the shadow government.

An interesting fact I came across during searches is this:

Which President is responsible for the highest percentage increase in national debt? https://www.self.inc/info/us-debt-by-president/

You ask what happens if Japan and Chine were to "call that debt"? Actually pretty much nothing good for their countries. Countries hold US debt for one reason, it's the safest most stable investment in the world, and they use the US Treasury warrants they hold in part to stabilize their own currencies by keeping the US dollar strong. Keeping the value of their currencies below the US dollar helps them promote exports that boost their economies. The bottom line though, is any time one country sells off some of it's US Treasury holdings, other countries snap it up to keep the US dollar stable in the market place.

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Debt Ceiling Showdown: What Investors Need To Know

FORBESMONEYWEALTH MANAGEMENT  Jan 22, 2023

While there have been several contentious past debt ceiling increases, this upcoming negotiation could be pretty noxious. Disagreement among Republicans on the need for spending cuts, a narrow House majority, and Democratic control of the Senate and Presidency seem likely to complicate attempts to reach a deal. In any case, it should not be expected to be a straightforward process this time.

Typically, additional uncertainty does not benefit the stock market’s performance, so it is instructive to look at past instances of debt ceiling negotiations. In 2011, the U.S. began using extraordinary measures to service the debt on May 16, reaching an agreement on August 2. During that period, the S&P 500 fell almost -6%. It is unlikely that the debt ceiling was the only reason for the decline, as Europe was mired in a debt crisis, and economic growth was slowing. Standard & Poor’s downgraded U.S. sovereign debt one notch from the top level of AAA, even though there was no default in 2011. In 2013, extraordinary measures were started on May 13, and an agreement was reached on October 17. During this period, the S&P 500 was almost 4% higher though stocks were down nearly -6% at one point.

Edited by Kirk W
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22 hours ago, Ray,IN said:

After reading all the linked articles and many I've found using a search engine, the U.S.A. debt is a house of cards. The Federal Reserve owns 78% of the national debt, and stays afloat by printing money out of thin air. This of course is completely legal since U.S.A. currency is no longer based on gold or silver.

I suppose we could run a family like this, borrow from your wife and each child to spend more money than we have, with the expectation of never repaying anyone; but in the beginning we gave them the money, so we'd have to print more money to be able to borrow from them, however that is illegal for all except the federal government.

The difference between the US debt and the debt of any kind of business is the assumption that the government will always be there to pay its obligations.  A company that couldn't meet its bond payments might try to float some additional securities but there would probably be few takers. 

As long as the US federal debt is considered 100% secure there are plenty of people who will buy it, even if the government is simply more money to pay its bills.  That's because there are two underlying assumptions--1.  A 100% expectation that the debt will get paid; 2.  That the US economy will continue to grow to support increased tax revenues which will enable such repayment.

If either f these underlying assumptions fail then there will be fewer people (or countries) willing to invest in US securities which is why uncertainty over the debt ceiling can have significant consequences.

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When I see these discussions I wonder, but can't find, what the US debt balance is vs GDP over past 40 is years. Or some other measure that would compare the debt in inflation adjusted terms.

Some economic theories suggest government debt don't matter as it promotes growth. This has been debated like gas vs diesel or Chevy vs Ford.

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7 hours ago, BusDreamer said:

When I see these discussions I wonder, but can't find, what the US debt balance is vs GDP over past 40 is years. Or some other measure that would compare the debt in inflation adjusted terms.

Some economic theories suggest government debt don't matter as it promotes growth. This has been debated like gas vs diesel or Chevy vs Ford.

https://tradingeconomics.com/united-states/government-debt-to-gdp

Here is the debt to GDP for all countries: https://worldeconomics.com/Debt/  I noted, as that percentage declines so does the standard of living.

IMO the U.S.A. is living in a bubble, will it break? 

Then there is the congressional millionaires club  that oversees the national debt.

Edited by Ray,IN
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On 1/22/2023 at 12:03 PM, Kirk W said:

1588px-Debt_to_GDP.webp.png

If debt is an issue you do need to look at states. Which states pay the most federal taxes and who pays the least in the federal tax base.

Then which states get the most federal handouts, take the most in federal funding. IT seems to be that the states that tout smaller government and no federal interference are also the ones who take the most in federal aid and pay in the least.

Here is a great chart for that:

7FF3xUvl.jpg

 

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10 hours ago, RV_ said:

Here is a great chart for that:

The chart would be much better if there was some explanation, or better yet a link to the source? In looking for your chart and information on it, I did a Google search on "which states get the most federal handouts" and found some very interesting sites. One of the more interesting features is that they do not all agree, although there does seem to be a pattern. You really need to look at several such reports and study how they arrive at the numbers.

 

Federal-Aid-2020-01-e1581455671552.png

Image is a table by SmartAsset titled "States Most Dependent on the Federal Government."
 Page 1 of 5  
Table with 5 columns and 50 rows. Currently displaying rows 1 to 10.
Rank State Federal Share of State Revenue Ratio of Federal Funding to Income Taxes Paid Percent of Workers Employed by Federal Government
1 West Virginia 45.16% 2.36 4.08%
2 New Mexico 41.80% 1.87 6.06%
3 Mississippi 47.31% 2.53 3.23%
4 Alabama 41.20% 1.25 3.33%
5 Alaska 50.83% 1.62 6.83%
6 Idaho 41.08% 0.91 2.75%
7 Louisiana (Tie) 52.27% 1.60 2.13%
7 Maine (Tie) 43.27% 1.19 2.31%
9 Wyoming 56.43% 1.36 3.37%
10 Montana 46.58% 1.04 3.54%

Federal Aid by State 2023

 

The ten states with the highest total federal funding are:

  1. California ($43.61 billion)
  2. Texas ($26.90 billion)
  3. Florida ($23.77 billion)
  4. New York ($22.06 billion)
  5. Virginia ($17.68 billion)
  6. Pennsylvania ($15.58 billion)
  7. Illinois ($13.18 billion)
  8. Ohio ($12.57 billion)
  9. North Carolina ($11.31 billion)
  10. Michigan ($10.84 billion)
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1 hour ago, RV_ said:

the article link and the website have a lot of other great visualizations too:

Thank you and that is a very interesting site. I'm bookmarking it.  ☺️  For the graph you posted, here is the legend that I wasn't sure about.

federal-budget-receipts-and-expenditures

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One thing that isn't reflected by the various figures for federal money to each state is what the source of that money is. Many of the western states have a lot of their land under federal ownership and a lot of minerals are taken out by a federal mineral lease and so a major share of those royalty payment are returned to the states that those minerals came from. The only extensive article on this that I can find is from 2013 but here is a link to it as it is interesting and answers part of the question of why some states get such large amounts of federal money. 

Federal Mineral Royalty Disbursements to States

May 30, 2013

fed_land_small.png

 

 

This one is more current on the disbursements to the states but is petroleum only.

Federal Fossil Fuel Disbursements to States

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